Troubled firm Lason Inc. doesn't fit Bruce Rauner's story

GOP governor hopeful touts business savvy, but 1 investment leaves a black mark on record

January 20, 2014|By Bob Secter and Jeff Coen, Tribune reporters

(Brian Cassella, Chicago Tribune)

Republican governor hopeful Bruce Rauner has shaped a campaign narrative as a business-savvy, detail-oriented Mr. Fixit in a state in dire need of fixing. But there's one investment in the venture capitalist's portfolio that diverts sharply from that storyline.

Lason Inc., a Detroit-area imaging company, was a darling of Wall Street back in 1999 when Rauner hailed it as a great example of how his venture capital firm built businesses.

A few months after praising its performance, Rauner resigned from its board of directors just as the company's high-flying stock began to crater. Lason imploded amid allegations by investors and criminal investigators that top executives cooked the books to boost the company's value.

Neither Rauner nor his partners at the venture firm GTCR were accused of any wrongdoing. The firm netted at least $32 million from its investment by selling almost all of its stock before the earnings scandal became public. However, records show, other investors and lenders lost about $285 million as a result of the systematic accounting fraud, and three top executives went to prison.

Mike Schrimpf, a spokesman for the first-time candidate, said Rauner and GTCR had cooperated with authorities years ago in the criminal investigation of Lason. Neither Schrimpf nor Rauner would discuss in detail the nature of Rauner's interactions with investigators or what he did at Lason.

"I don't know, that was a long time ago," Rauner said Thursday in a brief encounter with a Tribune reporter. "Sounds like the stuff you want to ask about is stuff that Mike's told you about, and I probably don't have that much to add."

Records and a 1999 Rauner interview with a business publication suggest Lason started out as a classic example from the playbook of GTCR, a highly successful Chicago-based equity investment firm: Buy control of an overlooked company, hire sharp managers, drive the value up through expansions and then exit with a substantial profit.

Rauner was one of two GTCR partners who took seats on Lason's board of directors to help drive its growth. Available records leave unclear just how attentive Rauner was, although he has boasted on the campaign trail in recent months of his hands-on involvement in the companies GTCR targets.

"We know how to drive results, we know how to get things done," he declared to Republican voters at one campaign stop in the fall. At another, he explained that "in business … you're in there in person, you're working, figuring out what matters, and you're solving problems. You hit a snag on one issue, you figure a way around it or figure a way to solve the problem to get a result."

A law professor at Wayne State University in Detroit who is familiar with the Lason case said such schemes typically count on directors not paying close attention to what's going on.

"If his (political) narrative is 'I'm a hands-on manager,' this is not a firm where you would want to say that," said Peter J. Henning, an expert on securities fraud and white collar crime. "If he was hands-on, he certainly might have gotten his fingers dirty."

Henning said Lason might be recalled as "one of the worst accounting frauds ever" had it not been upstaged by similar scandals at much bigger companies — Enron and WorldCom.

GTCR has a broad record of success over three decades investing some $10 billion in about 200 companies as diverse as fast food, coin-operated laundries, funeral homes and business outsourcing services. Rauner, who amassed a personal fortune during his years as a partner at GTCR, personally served on the boards of dozens of the firms GTCR took over.

Like others in the venture capital field, GTCR has suffered its share of soured investments. But Lason stands out.

Rarely do companies crash and burn as spectacularly as Lason, a provider of records management services for the Big Three domestic automakers before GTCR took over and launched an aggressive growth strategy. The firm bought 54 percent of Lason in 1995 for $10 million, according to records of the Securities and Exchange Commission.

Company reports filed with the SEC show that in his last year on the board, Rauner served on the executive committee with two of the company officials later convicted. That panel, according to the Lason filings, was empowered to "manage the business and affairs" of the company between meetings of the directors.

Another GTCR partner, Joseph Nolan, also served on the Lason board and sat on its audit committee, responsible for "reviewing and evaluating Lason's accounting policies and its system of internal accounting controls." Nolan did not return Tribune calls for comment.

Those Lason filings with the SEC state that in 1997 and 1998, Rauner was the only one of Lason's seven directors who did not attend at least 75 percent of the meetings of the board and assigned committees.